Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

03/01/2012

Leo Strine: MInor Prophet?

If the minor prophets of the Old Testament have a common message, it is their repetitive denunciation of the lust for power, the oppression of poor by the rich, and the ways in which insiders take advantage of outsiders. They were not really prophets in the Nostradamus sense of telling the future, so much as social critics pointing out injustice and ethical/moral lapses. They called society and its leaders to repentance.

Some years ago Ed Rock wrote a law review article, Saints and Sinners: How Does Delaware Corporate Law Work?, about Delaware judges that had a tremendous impact on my own thinking. In it, Ed argued that "Delaware cases can best be understood as attempts to create social norms for senior managers, directors and the lawyers who advise them." He then explained "how these norms are transmitted to the principal actors (managers, directors and lawyers), drawing on the 'A Memorandum to our Clients' genre, extrajudicial judicial utterances, and popular and trade press accounts."

In a powerful elaboration of Rock's thesis, Lyman Johnson has argued that Delaware judges have used cases as parables "demanding a measure of self- restraint—when those who direct or manage company affairs press self-gain (or sloth) to the point of intolerable excess." "In unveiling discrete stories within the master narrative, Delaware’s judges tell the tale of other protagonists—the 'saints and sinners' described by Edward Rock—and then offer their own assessments of those accounts."

In other words, Delaware judges have a prophetic function. Like the minor prophets of old, Delaware judges call out sinners among the rich and powerful and hold them up as examples of what not to do.

In part, singling out the sinners for opprobrium serves as a sanction and deterrent. This function invokes the controversial question of whether shaming is an appropriate sanction in corporate law. It is an issue on which I have frankly waffled over the years. There are good arguments on both sides and, at least for present purposes, I shall therefore take an agnostic position.

At the moment, the more important point is Rock and Johnson's thesis that shaming sinners is a way of creating social norms that influence the aspirational principles of corporate best practice. In Brehm v. Eisner, the Delaware Supreme Court referred to its "institutional aspirations that boards of directors of Delaware corporations live up to the highest standards of good corporate practices." Rock and Johnson help us to understand how Delaware courts seek to influence the content of those practices and to incentivize corporate actors to aspire to best practice rather than the bare legal minimum.

Which brings me to Delaware Chancellor Leo Strine. In the interests of full disclosure, I should say that I've met Strine many times. I respect and like him. Make of that what you will.

A few days ago, Larry Cunningham posted a sharp criticism of Strine's 2009 decision in the AIG case:

Should civil trial courts describe the pleadings alleging wrongdoing in criminal terms? In reading large numbers of opinions in corporate cases over the years, I can recall only one judge who did so. The judge was Leo Strine, an otherwise-obscure figure known among corporate law devotees because of his seat on the Delaware court that hears many business disputes among corporate interests.

Anyway, Cunningham is quite angry about Strine 2009 opinion in the AIG litigation:

Strine was evaluating whether the plaintiffs’ lawyers had alleged a link between their general claim that a corporation lacked adequate internal controls and their further claim that two corporate directors, in particular, knew of this. Strine acknowledged that making the link between a general failure of internal control and someone’s personal knowledge, and therefore culpability, requires a fair amount of detailed specifics. The defendants had challenged the plaintiff’s complaint as deficient in this regard. Strine then wrote the following (the snide style appears in the original, as I am quoting this literally):

“But here? Really? The Complaint fairly supports the assertion that AIG’s Inner Circle led a—and I use this term with knowledge of its strength—criminal organization.”

The prejudicial quality of this calculated and intemperate statement is obvious. It was also gratuitous, because it is beyond the relevant jurisdiction, experience and pleadings.

It's a bit puzzling that Cunningham is bashing a three year old opinion. As it turns out, however, his timing was impeccable.

It would be hard to argue with the proposition that Strine has a "stingingly robust vocabulary." One anonymous lawyer reportedly said that "'the first word I think of with him is scary,' ... alluding to Strine's occasional bursts of temper and penchant for cutting down lawyers who displease him." Katrina Dewey opines that:

Strine’s brilliance is staggering, his energy enormous; a boiling rage for the law of the now that is in your face and seething. He relishes skewering fat cats like Hannibal Lecter loves fava beans and a nice Chianti.

Strine's willingness to skewer fat cats cropped up again yesterday in his opinion in the In re El Paso Corporation Shareholder Litigation case. (Opinion here.) In brief, Goldman Sachs was on both sides of a takeover deal and Strine spanked them. Hard. As Alison Frankel reports in an excellent piece:

Chancellor Leo Strine of Delaware Chancery Court is thoroughly sick of what he perceives as Goldman Sachs' disregard for the M&A rules everyone else plays by. His 34-page decision Wednesday in a shareholder challenge to Kinder Morgan's $21.1 billion acquisition of El Paso Corp is filled with scorn for Goldman's eagerness to remain an adviser to longtime client El Paso even though Goldman held a $4 billion stake and two board seats at Kinder Morgan. Writing four months after he took Goldman to task for manipulating valuations in the Southern Peru Copper case, Strine used words like "tainted," "furtive," and "troubling" to describe the investment bank's continuing influence on El Paso CEO Douglas Foshee, even after it was supposed to be walled off from the Kinder deal. ...

That's tough talk, and Strine supplied some juicy details about Goldman's conduct to back it. ...

The chancellor was relentlessly snarky about the El Paso CEO (who, remember, hasn't yet appeared live in Strine's courtroom.) ...

Let's recap: Strine unleashed his stingingly robust vocabulary to describe the alleged wrongs of Goldman and Foshee, concluding that the El Paso/Kinder Morgan deal was likely tainted as a result of their conflicts. Yet he said there was nothing he could do to fix things right now, and added that there's a good chance shareholders won't be able to recover anything later against Goldman. If you're keeping score, that leaves only the El Paso board and Kinder Morgan unscathed by a ruling that essentially maintains the status quo.

I don't intend to get into the merits of the litigation. Instead, I want to point out that Strine is doing something very interesting here. He concluded that the law did not allow him to give relief to the shareholders. But he also concluded that the allegations showed insiders taking advantage of outsiders. A rich investment bank on both sides of the deal influencing the deal so as to make sure it ended up being structured to maximize the bank's profits. A CEO with conflicts of interest helping out a party that would be able to help him in the future. And so Strine used tough verbiage to call them out. Perhaps not as tough as was the case in AIG, but plenty tough.

Of course, it's been correctly observed that Strine's AIG opinion "contains many instructive pages on let's say good corporate law and governance practices." And so does the El Paso opinion. It will stand as a guide as to how not to conduct these sort of negotiations, but it also outlines aspirational best practices to which one ought to, for lack of a better word, aspire.

In particular, however, like AIG, El Paso seems to be a case of Strine telling a parable that is designed--like so many Delaware cases--to illustrate what happens "when those who direct or manage company affairs press self-gain (or sloth) to the point of intolerable excess." Like the minor prophets of old, Strine is using these opinions to call corporate leaders to repentance or, at least, "a measure of self-restraint."

Strine's not alone among Delaware judges in using tough words to achieve that goal.To the contrary, Ed Rock's article extracts many examples of what Johnson called "colorful, condemnatory language aimed at villainous conduct." Johnson notes, as but one prominent example, "memorable and biting" phrases from Chancellor Chandler's Disney opinion, concluding that "Chandler’s portrayal of Eisner brings to mind Trollope’s description of his iniquitous character, Melmotte—a nineteenth century Bernie Madoff—'whose arrogance in the midst of his inflated glory was overcoming him.'"

In this use of strong rhetoric, the Delaware courts again resemble the minor prophets. As a group, they made frequent use of vituperative and vitriolic language. Consider, for example, the incredibly powerful images in Chapter 8 of Amos.

Johnson identifies an important virtue to the use of such strong language:

The moral disapproval expressed in a court of equity’s opinion is a key feature of it. Former Chancellor William Allen has written, for example, that corporate directors are “members of moral communities with allegiances to moral codes.” He also has noted that “we would be badly wrong to think that knowledge of legal rules is all that we need to understand the legal world.” Furthermore, judges are among the very few persons in our society with the moral and legal authority to warn and exhort corporate elites. ...

A Chancery Court opinion, moreover—like a sermon, song, or story— has a “tone,” a “melody,” as well as words and a particular ending. Anyone who has been severely scolded and let off the hook remembers the scolding, as does anyone witnessing another person on the wrong end of a good dressing down.

All of which reminds me of the old joke about the mule trainer was asked how he was able to train such stubborn animals. "Let me show you," he said. The trainer grabbed a 2x4 and hit the mule over the head with it. "First," he said, "you get their attention." Strong, even vituperative language is the Delaware courts' 2x4.

In the Disney case, Johnson reports, law firm communications to clients did not convey the degree of moral condemnation in Chandler's opinion, but press accounts did:

... newspapers used strong words to characterize Chandler’s reproach of Eisner and the Disney board. The Los Angeles Times stated, variously, that the Chancellor had “rebuked,” “scolded,” “lambasted,” and “chided” Eisner and the directors, and had made “bristling comments” about them. The Wall Street Journal’s account stated that the judge at times had “chastised” the board and Eisner, and “did rebuke” them. The New York Times stated that Chandler had “chided” the directors and “offered pointed criticism” of Eisner and the board.

All three newspapers included Chandler’s crowning passage that Eisner had “enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom.”All three newspapers also included the unflattering description of Eisner as “Machiavellian,”with two of the three quoting the entire passage in which that word appeared. The term “Machiavellian,” of course, is a strongly negative descriptor, meaning cunning, scheming, and unscrupulous. It is customarily reserved for especially reprehensible and calculating behavior. Two of the three papers conveyed the “imperial CEO” descriptor.The New York Times report included Chandler’s passage that Eisner had “stacked his . . . board,” and the L.A. Times quoted the judge’s description of the Larry King interview as a “shameless public relations move” and his description of the whole affair as “a public spectacle.”

These three major newspapers, with a combined circulation numbering in the millions and likely a far larger readership, clearly conveyed intact the strongest and most morally judgmental language from the Chancellor’s opinion.

Any businessman who read any of those accounts witnessed precisely what it meant to be on "the wrong end of a good dressing down." The minor prophets knew this. So do the judges of the Delaware courts.

There is thus a perfectly legitimate argument in favor of the sort of "stingingly robust vocabulary" we see in Strine's opinions. The reference to a "criminal enterprise" in AIG, at worst, differs in degree but not in kind from the other examples we've seen.

So is it worse to call an organization a "criminal enterprise" than to call a person “Machiavellian"? I think not, although YMMV. So I would take exception to Cunningham's critique. AIG was not an outlier, but rather falls within the prophetic tradition of Delaware corporate law.